Donohue Candy and Tobacco Co., Inc. v. Consumer Product Distributors, Inc.Donohue Candy and Tobacco Co., Inc. v. Consumer Product Distributors, Inc.
MATSUMOTO, United States District Judge:
Plaintiffs Donohue Candy & Tobacco Co., Inc. (Donohue) and Kingston Candy & Tobacco Co., Inc. (Kingston and together with Donohue, plaintiffs) brought this action against defendant Consumer Product Distributors, Inc., doing business as J. Polep Distribution Services (Polep or defendant) by filing a complaint on April 10, 2019, alleging violations of New York’s tax laws regulating the sale of cigarettes. (ECF No. 1, Compl. 1.)1 Prior to the commencement of the instant action, plaintiffs Donohue and Kingston, along with Amsterdam Tobacco Co., Inc. (Amsterdam), Mountain Candy & Cigar Co., Inc. (Mountain Candy), and Sunrise Candy & Tobacco Corp. (Sunrise and collectively with plaintiffs Amsterdam and Mountain Candy, the original plaintiffs), all licensed cigarette distributors based in New York, brought a related action in Kings County Supreme Court on February 6, 2018, alleging similar violations of New York’s tax laws regulating cigarette sales, against Harold Levinson Associates, LLC (HLA), McLane Eastern, Inc., McLane Midwest, Inc., (together with McLane Eastern, McLane), Plainfield Tobacco and Candy Co., Inc., doing business as Resnick Distributors (Resnick), defendant Polep, and Core-Mark Midcontinent, Inc. (Core-Mark, and together with defendants Polep and Resnick, the original defendants). See Amsterdam Tobacco Co., Inc. v. Harold Levinson Assoc. LLC, No. 18-CV-1432, slip op. (E.D.N.Y. Sept. 26, 2019); (ECF No. 11-2, Def.’s Mem. in Support Mot. to Dismiss (Def.’s Mot.) 2, 7.) McLane removed that action, which was assigned docket number 18-CV-1432, to this court on March 8, 2018, pursuant to
In the removed case, i.e., docket number 18-CV-1432, the parties agreed to sever and remand all claims against HLA, a citizen of New York. See id., (ECF No. 20, Stip. re: Remand); (ECF No. 34, Order dated 5/31/2018). The parties then agreed to dismiss all claims against McLane and certain claims against each remaining defendant.
The original plaintiffs and the original defendants soon sought to sever this case into three separate actions, each based on the three amended complaints, and the court ordered the original plaintiffs to open two new cases and file their respective amended complaints as an initiating pleading in their respective new cases, assigned docket numbers 19-CV-2079 and 19-CV-2080, allowing them to proceed upon dismissal of the earlier complaint. See id., (Order dated 04/03/2019). Plaintiffs complied with the court’s order and on May 1, 2019, the court dismissed without prejudice plaintiffs’ claims against Polep in the original action, leaving only Amsterdam’s, Donohue’s, and Mountain Candy’s claims against Core-Mark in that action. See id., (Order dated 05/01/2019).
In the Complaint in the instant action, plaintiffs allege that defendant Polep systematically violated New York tax law by selling cigarettes to New York retailers at prices below the statutory minimum price set by the New York Cigarette Marketing Standards Act (CMSA),
BACKGROUND
The following facts are drawn exclusively from plaintiffs’ Complaint, which the court presumes to be true for the purposes of analyzing defendant’s 12(b)(6) motion. See Glob. Network Commc‘ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir. 2006) (citing Allaire Corp. v. Okumus, 433 F.3d 248, 249–50 (2d Cir. 2006)) (on a 12(b)(6) motion, we are constrained to accept as true the factual allegations contained in the complaint and draw all inferences in plaintiff‘s favor.) Plaintiffs are each New York corporations and cigarette wholesale dealers (or wholesalers), and during the relevant time period, were also licensed stamping agents. (Compl. ¶¶ 12-13.) Defendant is a New Jersey corporation and, like plaintiffs, is a licensed cigarette wholesaler and stamping agent in New York. (Id. ¶¶ 14-15.)
New York State regulates the distribution of cigarettes through its tax laws. (See id. at 4-10.) The State controls what entities can sell cigarettes, collects taxes on the sale of cigarettes, and sets certain minimum prices under the CMSA. (Id. at 4-5.) The typical distribution scheme for cigarettes begins with manufacturers who make and package cigarettes. (Id. ¶ 17.) In New York, as in many other states, stamping agents purchase cigarettes from the manufacturers and then purchase tax stamps from the state government. (Id.) The stamping agents affix these tax stamps to the cigarette packages and sell the stamped cigarettes to either wholesalers or retailers. (Id.) Wholesalers that are also licensed stamping agents will generally sell to retailers, though some wholesalers are not licensed stamping agents. (Id.)
Agents, wholesalers, and retailers must all be licensed by New York’s Tax Department
The CMSA sets a minimum price by formula at which stamping agents and wholesalers in this distribution scheme may sell cigarettes. (Id. ¶ 16.) Plaintiffs allege that Polep has engaged in a broad scheme to drive its cigarette prices below the statutory minimum by giving rebates to its New York customers dating back to 2015 and earlier. (Id. ¶ 45.) Polep’s list prices for cigarettes are almost always at the CMSA minimum price, and when it occasionally diverges from the minimum, its list prices exceed the minimum by pennies. (Id. ¶ 46.) As a regular part of its business, Polep extended rebates in various forms to its New York customers, including per-carton rebates of $2.00 and $2.50. (Id. ¶ 51.) Polep’s sales representatives used misleading codes on customer forms and invoices, allegedly invoicing per-carton rebates that gave the impression the amounts were for credits for damaged goods. (Id. ¶ 53.)
Plaintiffs offer two specific examples where Polep either obtained business from former customers of plaintiffs in New York, or prevented plaintiffs from increasing sales by offering per-carton rebates. Sometime in 2017, Kingston was a supplier to Congers BP, a New York cigarette retailer. (Id. ¶ 58.) Kingston sold both cigarettes and non-cigarette products, though cigarettes comprised about 95 percent of Kingston’s sales to Congers. (Id.) Kingston charged Congers cigarette list prices at exactly the CMSA minimum price, and these prices were the same as Polep’s list prices. (Id. ¶ 59.) Kingston stopped receiving orders from Congers in 2017, and Kingston soon discovered from Congers’ owner that it had moved its business to Polep because Polep was offering $2.00 per-carton rebates. (Id. ¶¶ 60-61.) No other competitor offered Congers cigarette prices that were equal to or lower than Polep’s prices. (Id. ¶ 64.)
Prior to 2016, Donohue was a secondary supplier to Star 3 Fuel Corp (Star), a retailer in Queensbury, New York. (Id. ¶ 67.) At the time, Donohue charged its cigarette list prices at exactly the CMSA-minimum, and Donohue’s prices were the same as Polep’s list prices. (Id. ¶ 68.) Sometime in 2016, a Star employee showed Donohue’s vice president an email from Polep in which Polep allegedly offered Star a $2.50 per-carton rebate. (Id. ¶ 69.) Star noted that it would have used Donohue as a primary supplier if not for Polep’s rebates. (Id.) Star continued its business relationship with Polep as a result of these cigarette rebates. (Id. ¶ 71.) At the time, Donohue was not aware of any other competitor that offered sales to Star at prices equal to or lower than Polep’s prices. (Id. ¶ 72.)
In addition to these specific examples, plaintiffs allege that a senior Polep sales manager apparently acknowledged Polep gave rebates to New York retailers of $2.00 or $2.50 per carton for weekly sales exceeding 100 cartons. (Id. ¶ 51.) The sales manager indicated the rebates are recorded as monthly statement credits for damaged goods. (Id. ¶ 53.) The sales manager instructed retailers receiving these credits not to report the rebate because the money’s illegal and it would not be by the book. (Id. ¶ 55.)
JURISDICTION
The court has original jurisdiction over this dispute, as plaintiff invokes the court’s diversity jurisdiction pursuant to
LEGAL STANDARD
Defendant moves under Rule 12(b)(6) to dismiss the Complaint for failure to state a claim. To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must plead facts that, if accepted as true, state a claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A complaint is facially plausible when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint need not contain detailed factual allegations, but must contain more than mere labels and conclusions or a formulaic recitation of the elements of a cause of action or naked assertions devoid of further factual enhancement. Id. For motions under Rule 12(b)(6), the court assumes the truth of all facts asserted in the operative complaint and draws all reasonable inferences from those facts in favor of the non-moving plaintiff. Global Network Commc‘ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir. 2006).
DISCUSSION
I. Cigarette Marketing Standards Act
New York’s legislature enacted the CMSA in response to a perceived need to regulate and stabilize cigarette sale prices due to predatory pricing by out-of-state dealers with similar minimum-price statutes. Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 319 (N.Y. 2003). The CMSA prohibits the sale of cigarettes below cost when the seller intends thereby to harm competition or to evade taxes. City of New York v. Golden Feather Smoke Shop, Inc., No. 08-CV-3966, 2009 WL 705815, at *13 (E.D.N.Y. Mar. 16, 2009) (citing Lorillard Tobacco, 99 N.Y.2d at 316). Specifically, an agent, wholesale dealer, or retail dealer violates the CMSA when it advertises, offers to sell, or sells cigarettes at less than cost, with intent to injure competitors, to destroy or substantially lessen competition, or to avoid the collection or payment of taxes.
Generally, the statute determines the minimum price for a carton of cigarettes by adding to the manufacturer’s price (i.e., the cost to a distributor) the cost of a tax stamp and a mark-up amount accounting for the wholesaler’s or retailer’s costs of doing business. See
The CMSA includes an exception to sales below the statutory minimum that is applicable here.
The CMSA also contemplates distributors will sell cigarettes together with other products, and that distributors, in common business practice, may offer rebates, concessions, or even gifts to customers. See
II. Collateral Estoppel
Defendant moves to dismiss the Complaint on the grounds that plaintiffs are collaterally estopped from bringing this action because a New York State court dismissed plaintiffs’ case against a different defendant based on similar allegations. (Def.’s Mot. 6-7.) That is, defendant argues plaintiffs are barred from re-litigating the issues presented in the Complaint because they had a full and fair opportunity to be heard on virtually identical factual allegations in the New York State case, but nevertheless had their case dismissed. (Id.) Plaintiffs respond that Polep has itself previously argued that the issues litigated in this case and those litigated in the State case are not identical, and that the State case included allegations against a different cigarette agent and concerned different retailers than those in this action. (Opp. 7.) Plaintiffs additionally argue that the State court’s decision dismissing the State action was deeply flawed and is on appeal. (Id.)
A federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered. Kiryas Joel All. v. Vill. of Kiryas Joel, 495 F. App’x 183, 186 n.1 (2d Cir. 2012) (citing Migra v. Warren City Sch. Dist. Bd. Of Educ., 465 U.S. 75, 81 (1984)). Here, defendants assert defensive collateral estoppel on the basis of a decision and order by the New York State Supreme Court, and invoke New York principles of collateral estoppel. Under New York law, collateral estoppel may be invoked to preclude a party from raising an issue (1) identical to an issue already decided; (2) in a previous proceeding in which that party had a full and fair opportunity to litigate; and (3) that is decisive in the present action. See Curry v. City of Syracuse, 316 F.3d 324, 331 (2d Cir. 2003) (explaining that the last factor slightly distinguishes state and federal collateral estoppel law). An issue is decisive if it would prove or disprove, without more, an essential element of any of the claims set forth in the complaint. Id. at 332. In addition, [t]he party seeking the benefit of collateral estoppel has the burden of demonstrating the identity of the issues . . . . Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 456, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985).
The parties’ dispute is limited to whether the issues here and in the State case are identical and it is defendant’s burden to demonstrate that is so. Defendant argues that the allegations in the State court action are virtually identical, that plaintiffs demand the same injunctive relief and damages, and that plaintiffs base their claims for relief under the same legal theory. (Def.’s Mot. 7.) Plaintiffs’ legal theory was dismissed as insufficient to state a claim in the State court action. Thus, defendant argues, the identical legal question presented here has already been decided against plaintiffs. (Id.)
In response, plaintiffs point to Polep’s Notice of Removal in the original federal case, No. 18-CV-1432, in which Polep argued that the claims in this case do not arise[] out of the same transaction or occurrence as those in the State case. (Opp. 8 (citing ECF No. 5, Fox Aff., Ex. D., Not. of Removal).) Plaintiffs also cite to Polep’s representations in this case that the original complaint in No. 18-CV-1432 allege[d] that each [original] Defendant
Resolving this dispute demands a review of the State court decision itself. The State court decision made two findings. (ECF No. 11-1, Koshgarian Aff., Ex. C, State court decision.) First, the State court found that HLA amply demonstrated that it lowered its prices to compete with others, and therefore satisfied the CMSA’s good faith exception for meeting competition. (State court decision 9 (analyzing
The difficulty in ascertaining the State court’s reasoning renders its decision an inappropriate basis to preclude plaintiffs’ claims against this defendant. Defendant has not shown with clarity how the State court decision resolved the issue before this court. See S.E.C. v. Monarch Funding Corp., 192 F.3d 295, 309 (2d Cir. 1999) ([I]n the absence of clarity on this issue, applying collateral estoppel . . . would be improper.); see also In re Refco Inc. Sec. Litig., No. 07-MD-1902 (JSR), 2010 WL 11475742, at *11 (S.D.N.Y. Mar. 2, 2010), report and recommendation adopted, No. 07 MDL 1902 (JSR), 2011 WL 13168455 (S.D.N.Y. May 4, 2011) (issue preclusion denied where movant failed to show with clarity that [prior decision] decided the issue in this case); Mitchell v. Humana Hosp.-Shoals, 942 F.2d 1581, 1584 (11th Cir. 1991) (refusing to apply collateral estoppel [b]ecause the state court did not specify the reasons for its decision, [and] we cannot be certain if the court actually decided the issue on the ground that would allow preclusion). Given this uncertainty, the court simply cannot say with any assurance exactly what issues the State court decided, or whether its resolution of those issues are decisive in the instant case.
Defendant did not carry its burden of showing that the issues in the State court matter are identical to those at bar. The State court case concerned HLA’s liability for alleged violations as to different retailers, none of which are presented here. Cf. Barrett v. Tema Dev. (1988), Inc., 463 F. Supp. 2d 423, 428 (S.D.N.Y. 2006), aff‘d, 251 F. App’x 698 (2d Cir. 2007) (issues were not identical where facts underlying [] claim to jurisdiction in this Court are substantially different from the facts . . . argued for personal jurisdiction in [] state court action.). Further, plaintiffs’ assertion of similar legal theories here and in State court says nothing about why the State court rejected those legal theories against HLA. Defendant insists that defensive
Defendant’s motion to dismiss on the ground of issue preclusion is therefore denied.
III. Statute of Limitations
Though defendant originally moved to dismiss some of plaintiffs’ claims as time-barred, (Def.’s Mot. 8-9), it appears to have abandoned this argument on reply, (Reply 4-9; see also Opp. 9). Defendant’s initial argument focuses on plaintiffs’ allegations concerning conduct that predated 2015, more than three years prior to the date plaintiffs initiated the original state court action. (Def.’s Mot. 9.) Plaintiffs, however, respond that they assert no claims for damages accruing earlier than the statutory period. (Opp. 9.) Indeed, plaintiffs only appear to bring claims for specific conduct occurring from 2015 and afterwards. Absent application of the continuing violation doctrine, plaintiffs’ damages, if any, will be limited by the applicable three-year limitations period governed by New York law. See
IV. Pleading Exceptions
Defendant argues that the Complaint fails to allege that its conduct did not fall within the CMSA’s exception for meeting competition in good faith. (Def.’s Mot. 12-13; Reply 7-8.) Plaintiffs respond that the good faith exception for meeting competition requires a wholesaler to prove a competitor’s below-CMSA-minimum price, which defendant has not done. (Opp. 11-12.)
As noted above, this action stems from that originally filed in Docket No. 18-CV-1432, before the undersigned. See Amsterdam Tobacco Co. v. Core-Mark Midcontinent, Inc., No. 18-CV-1432, 2019 WL 4696282, (E.D.N.Y. Sept. 26, 2019). There, the remaining defendant, Core-Mark, moved to dismiss the amended complaint, arguing, in part, that the plaintiffs had failed to allege that the meeting competition in good faith exception did not apply. Id. at *5. The court denied the motion to dismiss, finding that the CMSA did not require a plaintiff to plead facts affirmatively refuting a possible exception available to the defendant. Id. at *6. Defendant makes the same argument in moving to dismiss the Complaint in this action. For the same reasons articulated in the court’s September 26, 2019, Order, the court denies defendant’s motion to dismiss on these grounds. The CMSA’s exception for meeting competition in good faith need not be pleaded in the negative to survive a motion
V. Cigarette Sales Below CMSA Minimum
Defendant additionally argues that plaintiff has failed to allege any cigarette sales by Polep at prices below the CMSA’s statutory minimum because the giving of rebates is not prohibited conduct under the CMSA. (Def.’s Mot. 10-12.) Plaintiffs respond that the CMSA contemplates that rebates are one of the mechanisms that can be used to push prices below the legal minimum. (Opp. 10.)
Defendant’s assertion that rebates are not per se illegal under the CMSA is, of course, accurate if the rebate does not directly or indirectly serve to reduce the price below that at which cigarettes can be lawfully sold or purchased in [New York].
Defendant asserts that the Complaint does not allege any sales below the CMSA minimum, (Def.’s Mot. 11), but even a cursory review establishes that defendant is incorrect. In just one example, the Complaint describes how plaintiff Kingston had supplied a particular retailer, Congers, and charged list prices exactly at the CMSA minimum, the same as Polep’s list prices. (Compl. ¶¶ 58-59.) After Kingston stopped receiving orders from Congers in 2017, it inquired and learned from Congers’ owner that Polep had been giving Congers rebates of $2.00 per carton. (Id. ¶ 61.) Kingston consequently lost all of its business with Congers to Polep. (Id. ¶ 63.) Further, plaintiff alleges defendant’s own sales manager admitted to defendant’s use of rebates based on cigarette carton volume, and defendant’s knowledge that the conduct violated the law. (Id. ¶¶ 51-55.) Taken together, these allegations, which the court must assume are true when deciding a motion to dismiss, offer sufficient support to plaintiffs’ claim that Polep sold cigarettes at less than its cost. Plaintiffs also plead another example of such per-carton rebate arrangements by Polep, and further allege that Polep’s rebates push its prices below the statutory minimum when its prices are at or pennies above the CMSA minimum. (Id. ¶ 52.) Plaintiffs further allege that they have suffered a loss or reduction of cigarette business as a result of Polep’s alleged conduct. (Id. ¶ 75.) These allegations thus satisfy
VI. Damages Sufficiently Pleaded
Finally, defendant moves to dismiss the Complaint on the ground that plaintiffs did not sufficiently plead damages. (Def.’s Mot. 14.) Plaintiffs respond that they need only plead facts sufficient to reasonably measure or infer damages, and that the Complaint’s allegations that plaintiffs lost business are sufficient as to damages. (Opp. 13-14.) Defendant also argues that plaintiffs only allege specific statutory prices from October 2017, which would not apply to much of the alleged conduct, and that plaintiffs failed to mitigate their damages. (Def.’s Mot. 14-15.) As to defendant’s latter argument regarding mitigation, plaintiffs respond that defendant is attempting impermissibly to add requirements to the pleading standard, i.e., requiring a plaintiff to plead a defendant’s affirmative defense. (Opp. 14.)
The court agrees with plaintiffs that the amount of damages is reasonably inferable and measurable such that the allegations in the Complaint are sufficient to survive a motion to dismiss. Plaintiffs need not plead all the applicable statutory prices to be entitled to damages for defendant’s alleged violations throughout the damages period. Instead, the CMSA’s statutory scheme that sets a minimum carton price, and defendant’s alleged practice of charging near or at that minimum, facilitates a damages calculation here. Plaintiffs adequately explained how this pricing mechanism worked in the Complaint. (Compl. ¶¶ 27-37.) The court, or a jury, should have little difficulty calculating damages for defendant’s alleged violations of the CMSA based on evidentiary support for these allegations. Finally, Defendant cites no authority for its mitigation argument and, in any event, the court finds it is without merit for purposes of defendant’s motion.
CONCLUSION
For the foregoing reasons, defendant’s motion to dismiss is DENIED. The parties shall proceed to discovery and are hereby respectfully referred to Magistrate Judge Scanlon for all pre-trial matters.
SO ORDERED.
Dated: November 12, 2019
Brooklyn, New York
/s/
Kiyo A. Matsumoto
United States District Judge